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Director disqualification

As per the 1st of July, the Dutch Bankruptcy Act is amended and new legislation is in force in order to combat bankruptcy fraud. A managing director involved in bankruptcy fraud or mismanagement during (the period leading up to) a bankruptcy, now risks to be disqualified as a director.

How does it workThe Dutch Court, at the request of the public prosecutor or the insolvency administrator, may prohibit a managing director from becoming, or continuing to be, a managing (or supervisory) director of a Dutch legal entity in case of manifestly improper performance by such director during a bankruptcy, or during a period of three years prior thereto. Such director disqualification can be imposed for a maximum period of five years, and will be registered with the Dutch Chamber of Commerce, which registration is open for public inspection.
Based on the Dutch Bankruptcy Act, a managing director can be disqualified on any of the following five grounds, if so occurred during, or in a period of three years preceding the bankruptcy of a Dutch legal entity:

managing director’s liability has irrevocably been determined by the Dutch Court, on the basis of Dutch Civil Code provisions applicable to manifestly improper management, which improper management most likely caused the bankruptcy;

when having deliberately caused considerable loss to creditors;

in case of serious shortcomings in the obligations of cooperation and providing information towards the insolvency administrator;

the director, either as such or as natural person conducting its profession or business, has been involved in a bankruptcy twice before, for which it can be personally blamed; or

if the legal entity or its director has committed certain tax offences.

The disqualification rules also apply to (i) former directors, (ii) actual policy makers, (iii) executive directors, and (iv) in case of a ‘legal entity’-director: the directors (natural persons) of that ‘legal entity’-director.

What does it practically meanA disqualified managing director will be de-registered at the Dutch Chamber of Commerce as director of the entity involved, as well as – if so requested by the public prosecutor or the insolvency administrator – as managing (or supervisory) director of all other entities in which he or she fulfills such position.

Further, a managing director who has been disqualified by the Dutch Court cannot be appointed as a managing (or supervisory) director of any other Dutch legal entity during the period of its disqualification. Any appointment as such is void.

If as a result of such disqualification, the respective legal entity has no longer any managing (or supervisory) director(s) in office, the Dutch Court may – as an interim solution – appoint one or more managing (or supervisory) director(s) at its own discretion.

Supervisory directorsStriking point is that this new legislation does not apply to a supervisory director, whilst a disqualified managing director cannot be appointed as a supervisory director and, if already appointed as a supervisory director of another legal entity, can – as described above – be de-registered as such. The Dutch Minister of Justice simply gives as reason that a supervisory director is not as involved with the management of a company as a managing director, and should therefore not fall under the scope of this new legislation. We are curious whether the government at a later stage (after reviewing the effect of this new legislation) will implement the disqualification for supervisory directors as well.

Follow-upsThe Dutch Court may only take into account any mismanagement of managing directors as of the implementation of this legislation on July 1, 2016, for determination of director disqualification. It may therefore take a while before the first director disqualification will have been irrevocably imposed by the Dutch Court.

We will therefore keep track of the developments with considerable interest!